Get out of Perth housing now

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By Leith van Onselen

In last year’s member’s report on Perth property, released in July, I warned that risks were building fast and that the market faced a repeat of the mid-1970s experience, whereby dwelling values retreated by 30% in real terms over an eight-year period:

Risks continue to build for the Western Australian economy, with both commodity prices and mining investment on the decline, which is likely to lead to rising unemployment and falling income growth. The Western Australian Government also faces the prospect of a deteriorating budgetary position, as lower iron ore prices reduce mining royalties, which could potentially be met with cuts to public services and jobs…

Following the end of the mid-1970s mining boom, Perth house prices declined by nearly 30% in inflation-adjusted terms over an eight year period. If history is any guide, similar falls could be in the offing over coming years as Western Australia’s once-in-a-century mining boom unwinds.

With iron ore prices retreating even faster than MacroBusiness had predicted, reports emerged over the weekend about the deleterious impacts on employment in Western Australia, which is beginning to spill-over into its property markets. From The Canberra Times:

Mechanic Neil Tennant knows he’s been pretty lucky.

When he quit his job as a mechanic at a car dealership to work on bigger machines driving across the Pilbara’s iron-rich dirt five years ago, his pay packet doubled.

It kept swelling, allowing him to buy an investment property and begin doing up his dream home…

Tennant, 31, was cashed up and, like many others, living the dream. This week everything changed.

The crashing ore price cost him his job working for a contractor with Mount Gibson Iron…

“The chances of getting the same job with another employer is going to be fairly difficult with so many people back out on the ‘meat market’,” he tells Fairfax Media.

He’s selling that investment property and sending off applications to other miners.

Aware of mass sackings across the industry, he’s not taking his chances. He has also applied for a job at Super Cheap Auto…

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It is worth pointing-out that Western Australians have been some of the biggest buyers of negatively geared property investments. According to the most recent Australian Tax Office (ATO) Statistics for 2011-12, 11.6% of Western Australians owned a negatively geared (loss-making) property losing on average $12,423 in 2011-12 (see below charts).

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With Western Australian mining capex yet to retreat from record highs, costing many thousand more job losses:

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Dwelling construction booming just as population growth is sliding:

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And rents falling as vacancies rise:

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It’s fair to say that these are very dangerous times to be a negatively geared Perth landlord, or a home buyer looking to leverage-up into their first home.

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If you are an investor, you should consider selling-out while the going is still good, and before a horde of negatively geared mining-exposed workers hit the panic button.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.